What The Pensions Regulator doesn’t tell you!
Yesterday I met with a Financial Advisor from Sanlam Wealth Planning to discuss the different pension options for companies. We were both in agreement that The Pensions Regulator’s Guide lacks clarity on how to weigh up your different options and doesn’t necessarily give the employer the whole picture (it is also very confusing and contradicts itself in places).
From our meeting a few interesting nuggets of information came to light that I wanted to share with you all. They concern eligibility, opting out, paternal leave and pensionable pay.
The Pensions Regulator categorises the eligibility of the workforce to show the employer the minimum number of staff that they are required to put into the company pension scheme. This doesn’t mean that a company may not offer the pension to all employees as part of its benefits package. In fact a business might find this to be easier and more cost effective, as the assessment process of AE will be simplified so will save time and ensure that they are able to budget more accurately. Including all employees will also eliminate discrimination and offering a good benefit package will possibly attract a higher standard of employee and enhance employee retention.
Remember The Pensions Regulator is only setting out minimum requirements and over the years contribution costs will go up for both the employer and the employee. As long as you set up a qualifying pension scheme you as the employer can create a bespoke offering for your employees.
Our advice is to speak to a Financial Advisor as soon as possible to get a better understanding of your options whether or not you want to follow the minimum requirements or tailor a scheme to suit your company.
The Importance of Scheme Rules
Did you know an employee can join and leave a company pension scheme as often as they want?
For example; Jane is automatically enrolled in the company pension scheme and pays into it for 6 months however, this next month she is short of cash as her car needs an MOT so she decided to leave the scheme for a month, and she then opts back in next month. Three months later she decides she wants to leave the scheme again so that she can have some extra cash for her holiday. This is great for Jane but a real headache for the employer.
Did you know you can design the scheme rules to determine when an employee can opt back into the scheme? This can be up to 12 months. This will ease the administration burden for the employer and focus the employees mind as to whether they want to lose out on up 12 months of employer pension contributions.
Parental Leave (maternity leave, paternity leave or adoption leave).
Here I simply want to highlight that whilst an employee is taking their paternal leave you the employer are still contributing to the employee’s pension pot based on their full earnings prior to them going on parental leave.
The Pensionable Pay Conundrum
For me this is where the regulations get confusing. Therefore with the help of my strategic partner from Sanlam Wealth Planning I am going to try and simplify how as an employer you can tailor the employer contributions.
Whether you need to automatically enrol an employee depends upon a number of factors the main two being age and wage.
For this example I am going to assume a male aged 30 who earns £30,000 per annum of which £20,000 is basic pay and £10,000 is commission. I am also going to assume that the employer pays the full employer contribution rather than increasing or “phasing” it in over a number of years for the sake of simplicity.
For automatic enrolment assessment (i.e. do they need to be enrolled) pay is most forms of earned income, this typically includes;
statutory sick pay
statutory maternity pay
ordinary or additional statutory paternity pay
statutory adoption pay
However what you pay an employee and what their pensionable pay is can be two different things.
Qualifying Earnings – Cost control
Qualifying earnings are based on an employee’s total earnings.
However pensionable pay is only calculated on earnings that fall between £5,824 and £42,385 (2015/2016).
The total contribution will be 8%
At least 3% from the employer and the balance from the employee and the government via tax relief
In this example the employer contribution would be £725.28 per annum.
You can also certify pension pay from the first pound of income as an employer you have three options.
Set 1 – The simple option
Total contribution = 9%
At least 4% from the Employer + the balance from the employee and the Government via tax relief
This is based on an employee’s basic annual gross salary and may exclude commission/overtime/bonuses. Your contributions are based on a set amount each month making it easier to manage the finances.
In this example the employer contribution would be £800 per annum.
Set 2 – Lower cost more administration
Total contribution = 8%
At least 3% from the employer + the balance from the employee and the government via tax relief
In order to use this set you must be able to demonstrate pensionable pay is at least equal to basic pay and at least 85% of total earnings across the scheme. In other words does basic pay make up 85% or more of the employer’s total payroll cost for that employee?
This creates an additional administrative burden for employees with a mix of salary, bonuses and overtime payments to ensure they remain compliant.
In the above example basic pay only equals 66% of total earnings so it is unlikely it could be used if other members of the scheme have a similar pay structure.
Set 3 – An open ended cost
Total contribution = 7%
At least 3% from the employer with the balance from the employee and the government via tax relief
All earnings are pensionable and as such your pension costs are not capped.
In this example the employer contribution would be £900 per annum.
I believe that the above illustrates how “minor” design decisions can have major cost implications to your business.
I understand that this procedure puts a tremendous administrative burden and additional cost on you as an employer however the sooner you face up to the fact that the process of Auto Enrolment cannot be ignored (IT IS THE LAW) and start to prepare, well in advance of your allotted staging date, the smoother the transition will be.
For more information and assistance in preparing for Auto Enrolment please contact me at firstname.lastname@example.org